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Advisors should approach planning ‘armed with caring’

A report released Wednesday found that regardless of age, most employees have never run a retirement projection, the report found. This is especially troubling for those close to retirement; 57% of employees between 55 and 64 haven’t calculated whether they’re on track to replace at least 80% of their income.

Knowing what’s in store for them doesn’t seem to change their behavior, though. Employees who have calculated whether they are on track only to discover that they are not received a financial wellness score of just 4.2 out of 10, compared with 4.7 for those who didn’t know. Employees who knew they were on track, and who had good money management skills like maintaining a cash reserve, fully paying credit card bills each month and keeping a debt payment plan, scored much higher at 7.2 out of 10.

It’s those money management skills, the report found, that are so important to an employee’s retirement preparedness. The report found “significant correlations” between retirement preparedness and good money management habits. The report noted that while some employees have gotten better with managing their money, “most are still in a position where they need to make further improvements.”

Michael Smith, resident financial planner at Financial Finesse, attributes employees’ reluctance to run retirement projections to a combination of two things: their confusion about how to start and their fear of what they’ll find.

“The majority of people who had never run a projection were more in line with people who were not on track,” Smith told AdvisorOne.

“There’s definitely an element of ‘I don’t want to know,’” he said, adding that employees “don’t know where to go or how to start the conversation.”

Another factor, though, is their overall pessimism about the economy. “Pensions are dwindling, and people joke about Social Security not always being there,” Smith said. “Everyone’s a little afraid now.”

The report named several challenges today’s employees face in planning for retirement that past generations did not, including less assistance from employers, decreased Social Security and government benefits, lower market returns and interest rates on investments, lower home equity and higher health care costs coupled with longer life spans to plan for.

Less than 17% of employees expect to receive income from a defined-benefit plan, the report found, and Social Security is expected to replace less retirement income.

The mortgage crisis led to a significant decline in home equity, as the ratio of equity to value fell to 38% at the end of March 2011, according to the report. At the end of the 1980s, that ratio was closer to 67%.

“The environment is changing faster than employees are,” Financial Finesse CEO Liz Davidson said in a press release. “They need to further accelerate their savings to compensate for the fact that they can no longer depend as much on their employers and the government for retirement income.”

Davidson noted that in a tough economy, employees have to “better prioritize” their financial goals and keep a tight grasp on their daily expenses.

“What we’ve seen is that employees’ saving behavior is highly correlated to other aspects of their finances,” she said. “When they have their debt under control, are saving for other long-term goals, and pay their bills on time regularly, then they set themselves up for good saving habits and it carries into their retirement planning.”

There are two main things that employees need to do to prepare for retirement, Smith, (left), said. The first is obvious: “save as much as humanly possible.” Before they are able to do that, though, “they need to get a handle on their day-to-day expenses.”

“Most people have no idea how much money they spend or where their money goes,” Smith concluded. “Budgeting sounds like a dirty word, but it really isn’t and it’s key to preparing for retirement.”

One of the biggest ways advisors can help employees is to talk with everyone in a way that is supportive of their goals, Smith said.

Advisors need to approach planning with the “understanding that a lot of people aren’t where they want to be, and can address it in a non-threatening, non-judgmental way, armed with caring for the individual,” Smith said.

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